Cocoa Will Dip, Then Pop
Corner | SATURDAY, JULY 31, 2010
Short-term, cocoa prices will be tepid, but longer term, they will heat up, given growing global demand for quality chocolates.
SUPPLIES SHOULD FINALLY rebound when the main
Ivory Coast harvest begins in October. That could lead
to near-term price weakness, but the longer-term picture
in the cocoa market were frazzled in late July, on reports
that U.K.-based hedge fund Armajaro had taken delivery
of about 240,000 metric tons, some $1 billion worth,
of cocoa from London's Liffe market, where there are
no position limits. But the impact of that delivery
was muted days later, when news reports said nearly
half of the delivery most likely went to a chocolatier.
Shawn Hackett, president of Hackett Global Advisors
in Boyton Beach, Fla., says that when an end-user comes
in, it sometimes indicates a top in a market.
a less-than-robust harvest for the 2009-10 marketing
year (which ends Sept. 30) in West Africa, the
main source of the world's cocoa, has boosted
prices to about $3,000 a metric ton on the ICE
Futures U.S. contract this year. Restocking of
depleted supplies by chocolate makers and other
users has helped keep prices from cooling off.
coming harvest should be ample enough to fill
immediate gaps caused by last year's short crop.
But rebounding demand and problems in the Ivory
Coast may allow prices to break through and stay
above the $3,000 barrier.
is two months away, good weather and a lack of disease
should allow the Ivory Coast to produce about 1.1 million
to 1.2 million metric tons—an average annual crop—for
the 2010-2011 harvest, analysts contend, which should
be ample supply. The West African nation produces about
35% of the world's cocoa, so chocolate makers live or
die by the size of its harvest. A civil war in 2002-03
has left the country without an elected president, with
elections repeatedly postponed. Sudakshina Unnikrishnan,
an analyst at Barclays Capital in London, says the political
instability has led to a lack of much-needed investment
in the cocoa sector. Ivory Coast production is stagnant,
held down by weak yields and aging trees.
If the Ivorian
crop comes in as large as expected, Jack Scoville, an
analyst at Price Futures Group in Chicago, says that
the December ICE contract could slip to $2,800. Friday,
nearby September ICE cocoa settled at $3,065, up 3.3%
on the week. Supplies should be large enough to correct
the market imbalance, and there could be a small surplus,
he believes, which could mean prices could dip to $2,600
to $2,400 by the first part of the 2010-2011 year.
Cordier, portfolio manager for Tampa brokerage Optionsellers.com,
says that, while short-term supplies will be ample,
demand should rise. That makes him bullish to $3,500
on cocoa over the next six to 12 months. Chocolate consumption
is growing in the emerging markets, especially China,
India and Russia. Demand in Western nations is also
improving after last year's recession. That's been reflected
in cocoa-grindings data, which measure how many cocoa
beans are processed into products like cocoa butter
and cocoa powder.
hurt dark-chocolate sales more strongly than those of
less-expensive milk chocolate, Unnikrishnan says. Cordier
says that if the U.S. economy improves, American consumers
might buy more better-quality chocolates, which would
mean more cocoa usage. Barclays is also bullish. It
sees prices hitting $3,100 a ton during the current
quarter and $3,150 in the following six months.